Worldwide: New Sanctions Against Russia Have Unfavorable Impact On Defense Sector, With Carve-Outs Favoring Certain Aspects Of The Aerospace Industry

On Aug. 27, 2018, the U.S. State Department published new sanctions against Russia based on the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act) after determining that the government of Russia has used chemical weapons in violation of international law or lethal chemical weapons against its own nationals. This imposition of sanctions followed reports regarding the use of a Novichok nerve agent by the government of Russia in an attempt to assassinate U.K. citizen Sergei Skripal and his daughter, Yulia Skripal. The State Department partially waived the application of certain sanctions otherwise required under the CBW Act.

As illustrated below, the new U.S. sanctions against Russia have a particular effect on persons in the defense sector, with a much more favorable impact reserved for those in the aerospace industry (including relative to the space launch of U.S.-origin non-military spacecraft by Russian parties).

Overview of Key Aspects of New U.S. Sanctions Against Russia and Related Waivers

Effective for at least one year from the date of publication and until further notice, the following sanctions are imposed and waived, as appropriate:

  1. Foreign Assistance. A requirement under the CBW Act that would otherwise mandate the termination of foreign assistance to Russia (under the Foreign Assistance Act of 1961) is waived.
  2. Arms Sales. The State Department is requiring the termination of (a) sales to Russia under the Arms Export Control Act of any defense articles, defense services, or design and construction services subject to the jurisdiction of the International Traffic in Arms Regulations (ITAR) and (b) licenses for the export to Russia of any item on the ITAR's U.S. Munitions List (USML). However, the State Department is waiving the application of this sanction with respect to the issuance of licenses in support of government space cooperation and commercial space launches, provided that the licenses will be issued on a case-by-case basis.
  3. Arms Sales Financing. The State Department is terminating all foreign military financing for Russia under the Arms Export Control Act.
  4. Denial of U.S. Government Credit or Other Financial Assistance. The State Department is denying to Russia any credit, credit guarantees or other financial assistance by any department, agency or instrumentality of the U.S. government.
  5. Exports of National Security (NS)-Sensitive Goods and Technology. The State Department is prohibiting the export to Russia of any goods and technology that are controlled for NS reasons on the Commerce Control List (CCL) contained in Supplement 4 to Part 774 of the Export Administration Regulations (EAR). However, the State Department is waiving the application of this sanction with respect to exports/re-exports of goods or technology:
  • Eligible under License Exceptions GOV, ENC, RPL, BAG, TMP, TSU, APR, CIV and AVS;
  • Pursuant to a "new" license" and
    • Necessary for the safety of flight of civil fixed-wing passenger aviation;
    • For deemed exports/re-exports to Russian nationals;
    • For exports/re-exports to wholly-owned U.S. subsidiaries in Russia;
    • In support of government space cooperation and commercial space launches; or
    • For commercial end users and civil end uses in Russia; or
  • For new licenses to export NS-controlled goods or technology to Russian state-owned or state-funded enterprises, although such licenses will be subject to a "presumption of denial" policy.

Due Diligence Considerations and Takeaways

U.S. sanctions against Russia arising out of the violation of the CBW Act will have a substantial impact on U.S. persons engaged in the export/re-export of military goods, technology and/or services. With the prohibition against foreign military financing, general termination of new licenses authorizing the export of items on the USML to Russia, termination of the sale to Russia of defense articles and services subject to the ITAR, and termination of the sale to Russia of NS-controlled items for military end uses/users, defense contractors and service providers as well as manufacturers of militarily- and technologically-sensitive items have effectively lost an export/re-export market and must be extra vigilant to ensure that military items are not sent to Russia. Those affected should consider revising internal compliance policies and procedures, training relevant personnel, and monitoring exports and re-exports as appropriate to ensure continued compliance with U.S. export control and sanctions laws and regulations.

In contrast to those in the defense sector, U.S. persons in the aerospace industry have been allowed a number of waivers in instances when relevant activities are in support of government space cooperation and commercial space launches or for commercial end users and civil end uses in Russia. We would be happy to work with you to determine whether contemplated transactions qualify for these and other potentially applicable waivers of otherwise sanctioned activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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